Hospital Charges Crazy? Check Your Fund Fees

Americans have long known that medical care is much, much cheaper abroad. What they didn’t know until recently is that the same procedure at one hospital can cost a fraction even across town.

Treating a heart attack, for instance, costs $89,000 in one Miami hospital and more than $166,000 a few miles away, reports The Washington Post, using new federal government data. A joint replacement in Washington, D.C. ran $30,000 in one place and nearly $69,000 nearby.

There are a lot of complex reasons why healthcare prices vary so widely. A big one is industry secrecy; hospitals don’t want their competitors to undercut them, so everyone keeps quiet.

This is especially true for retirement savers. How do funds charge you? Through a seemingly small fee that pays the managers who make the underlying investments, reported as part of the total “expense ratio.”

Active managers argue that the fees are reasonable because they offer the potential for a higher return, by which they mean “higher than the market itself.”

Could you manage to pick those few winning managers, year after year? Vanguard Group looked at this question in depth, and your chances are about the same as flipping a coin.

Okay, you might say, I’ll buy an S&P 500 index fund and go to sleep for a few years. Well, careful now, the “hospital charges” trap is in your path.

Turns out, there are a lot of funds with S&P 500 in their name and which appear to own the index. Yet their fees are nowhere near the same.

To look at two extremes, we ran a Lipper screen on funds that own the popular, broad U.S. stock index. We found the Rydex Series Trust S&P 500 Fund Class C (RYSYX) at an expense ratio of 2.26% and the Vanguard S&P 500 ETF (VOO) at an expense ratio of 0.05%.

To be fair, these are very different products. The Rydex fund is managed. At this writing, for instance, it holds nearly 25% cash, according to Morningstar. It’s no index fund, even if S&P 500 is part of the name.

There’s no pretense of talent or even activity over at Vanguard’s VOO fund. Look under the hood there and you’ll find nearly 99% stock and tiny bit of cash, essentially a snapshot of incoming dividend flows soon to be redistributed back into shares.

We ran both funds through the fund analyzer at FINRA, an industry-run regulator. Imagine $100,000 earning a market return of 7% over two decades. All things being equal, what happens?

The managed fund ends up at a balance of $246,256 while the passive fund ends at $383,118. Shockingly, total fees at the active Rydex fund come to $73,357 vs. $2,108 at the passive Vanguard fund. That’s almost 35 times more expensive!

Arguably, a retirement investor would never own this fund. Likewise, there must be at least one active S&P 500 fund manager out there who can say he or she beats the market in a way that matters to retirement-oriented investors, consistently and cheaply.

It’s just that your chance of owning the right active fund during the right year is exactly that — chance.

Update: This column has been edited to reflect reader criticism in comments.

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Did you do any research for this, or did you just look at Morningstar and make some assumptions?

The Rydex fund is not actively managed. It’s 100% fully exposed to the S&P 500 each day. They hold cash because part of the exposure comes from futures contracts.

This fund, much like other high expense ratio offerings from ProFunds, allows unlimited daily trading by active investors like myself. Unlimited trading. Try that in a Vanguard mutual fund and they’ll send Tonya Harding to your house.

My trend-following model generates about 100 trades per year, and I can bounce in and out of these funds with no drama and no additional fees. In the end, it’s actually cheaper than doing the same thing in VOO or SPY where I’d have to pay a spread and a commission each time. Those costs add up fast in an active model.

Rydex and ProFunds are niche products that aren’t for everybody. Buy-and-hold investors should steer clear, but to suggest that these funds have no legitimate use shows a complete lack of understanding on your part.

After you correct your facts, change your title. I’d be absolutely amazed if a single retirement platform allowed the use of these funds without an avalanche of disclosure and waivers. If they do, then the plan administrator is who you should be demonizing – not the fund company.

Floyd, I am sure they have a use among professionals. As the RYSYX prospectus notes, the fund uses a variety of instruments, including equity index swaps, future contracts and options in order to be able to offer exposure to an S&P 500 return in their words “without investing directly in the securities included in the underlying index.”

The prospectus then specifically warns investors of “active trading risk” associated with the fund. For instance, the turnover on RYSYX is 196% vs. 3% for VOO. It’s hardly appropriate for retirement investors, as you correctly note.

Perhaps the comparison is unfair, and I do take pains to point out that RYSYX and VOO are different products for very different investors, but I stand by my larger argument:

That is, investors too often take funds at face value based on their marketing name (“S&P 500 Fund”) and fail to realize the fundamental risk they take in owning expensive managed funds over long periods, as the FINRA calculation illustrates.

At your suggestion, I have edited the title and portions of the column, as noted in the column itself. Thanks for taking the time to comment. I appreciate the critique.

Retired people can comparison shop before they put money into a mutual fund, but many don’t and rely on a “financial adviser” (i.e. salesman) to make the choice. Naturally, the salesman expects his cut.

When you have a heart attack and if you are with someone and if they can reach 911, you will probably be taken to the nearest hospital, not necessarily the cheapest. If you don’t have good insurance, the ambulance bill alone may ruin your budget.

In Berkeley, CA, the cost of an ambulance ride of several miles in late 2008, was over $1,500. A similar ride in the suburbs of Toronto, Canada in 2012 was under $250 for people not covered by the government plan (tourists). Why the big difference? The gun shot victims in Berkeley probably pay nothing for the ambulance ride, while in Canada, just about everyone is covered by government sponsored health insurance (single payer). In Ontario, the co-pay for covered residents is a low $45.